A daily dose of odds and sods, some interesting, some bizarre, some funny, some thought provoking items which I have stumbled across the web. All to be taken with a grain of daily salt!!

Monday, April 15

Delusion and Deception in Large Infrastructure Projects

managing project costs are an integral part of project management. I've handled projects which are fairly large, up to 2bn in size and yes, you may expect costs to be straight forward.

but when you are talking about multi year horizons, zillions of factors, tons of unknown unknowns and known unknowns and even bad estimation of known knowns (nod to rumsfeld), you usually go off piste very easily. the first estimate usually is low to get it approved and then the snowball happens..typical..people expect me to have a crystal ball to know costs exactly. when i talk about estimated costs for projected benefits, they turn around and say, deliver the same benefit for 20% of the costs. No, you only get 20% of the benefits for 20% of the costs but lets start..

so when I read this article, I wasnt surprised. I quote the conclusion

Large infrastructure investments are a vital component of any public or private institution. Unfortunately, cost overruns, delays and exaggerated benefits are the norm rather than the exception for roads, bridges, stadiums, concert halls, new plants, etc.Although large infrastructure projects occur frequently across the globe, any individual project is often a once in a career decision for a public or private executive. Thus it is difficult for executives to learn from their own prior mistakes. It is rare for executives to deliberately learn from similar projects other have attempted. Typically executives to adopt an inside view of any particular problem – where they focus on the specifics of the case at hand. Without the opportunity to learn from rapid and unambiguous feedback regarding their estimates of costs and benefits, executives can hardly learn from these unique decisions and avoid making similar mistakes in future projects. In such situations, inside view thinking leads to numerous cognitive biases that result in optimistic delusions. These, often individual, optimistic delusions are confounded, sometimes even dwarfed, by the magnitude of strategic deceptions among the different actors in the system. On several occasions, however, decision makers have attempted to justify their deceptive behavior by arguing that the decision was in the public interest. On one hand, it can be argued that public-sector executives may decide to deliberately underestimate costs in order to provide public officials with an incentive to cut costs and thereby to save the public’s money. According to thistype of explanation, higher cost estimates would be an incentive for wasteful contractors to spend more of the taxpayer’s money. Empirical studies have identified executives and planners who say they deliberately underestimate costsin this manner to save public money.67 Merewitz endorsed and summarized this viewpoint as “keeping costs low is more important than estimating costs correctly”

On the other hand, a second explanation in terms of public interest covers the not uncommon situation where project promoters believe their venture will benefit society and posterity. They feel that they should do anything possible to make the project happen, including cooking forecasts of costs and benefits. Both types of public-interest explanations see the end (project approval) as justifying the means (estimates of costs and benefits that show the project should be approved).69However, these arguments overlook an important fact. Underestimating the costs and overestimating the benefits of a given project results in artificially high benefit-cost ratio, which in turn leads to two problems. First, the project may be started despite the fact that it is not economically viable. Second, a project may be started instead of another project that would have yielded higher returns had the actual costs and benefits of both projects been known. Thus, for reasons of economic efficiency alone, the argument thatcost underestimation saves money must be rejected.70 As a case in point, an ex post benefit-cost analysis of the Channel tunnel between France and the UK showed that the actual net present value of the project to the British economy was minus US$17.8 billion and the actual internal rate of return minus 14.45 percent. The study concluded that “The British Economy would have been better off had the Tunnel never been constructed”.71Because delusion is often accompanied by strategic deception, this study’s prescriptive advice has been broken into two parts. First, we focused on best practices to diminish strategic deceptions (e.g. P-A issues) in the specific context of infrastructure projects. Next, we examined how executives can adopt an “outside view” of problems by using reference class forecasting. This statistical procedure uses both a forecaster’s intuition and historical data to mitigate the two types of errors and arrive at a more accurate estimate. The American Planning Association has recommended this procedure for large infrastructure projects. Its widespread use would surely produce more accurate estimates of large infrastructure projects and projects like Toll Collect and the Channel tunnel would be profitably and happily foregone by the vast majority of the public. Ultimately, accurate reference class forecasting, proper incentives and budgets are the way to go.

All I can say to this article is, hahahahahahahahah

dream on.

Also see this rather interesting paper on planning of large infrastructure projects.